Disintermediation/Reintermediation
Julia King. Computerworld

(Article Summary)
Many companies sell products and services directly to consumers and businesses online, cutting out intermediaries. But disintermediation is not turning out to be all it was cracked up to be. Gartner Group Inc. predicts that more than 1/2 of all companies now building or maintaining direct-to-customer Web sites will abandon them over the next 3 years. Instead, they will rely on, among other things, new Web-based intermediaries that bring buyers and sellers together in new ways. OfficeDepot.com cut a deal earlier this year with Hewlett-Packard Co. under which it could sell HP's Series 2000 printers exclusively for a short period of time, giving it a head start over its competitors in the retail channel. In exchange, OfficeDepot.com, which is one of HP's largest retailers, sent key marketing and customer data back to HP.

Disintermediation refers to cutting out the middlemen in e-commerce transactions. Examples include General Motors Corp. bypassing dealerships to sell cars directly to consumers, and insurance companies skirting their own agents to sell products and services.

Reintermediation refers to using the Internet to reassemble buyers, sellers and other partners in a traditional supply chain in new ways. Examples include New York-based e-Steel Corp. and Philadelphia-based PetroChemNet Inc. bringing together producers, traders, distributors and buyers of steel and chemicals, respectively, in Web-based marketplaces.


THANKS TO THE near-ubiquity of the Internet, just about any company that wants to can sell its products and services directly to consumers and businesses online. And many do, because cutting out intermediaries - otherwise known as disintermediation can mean bigger profits and greater access to valuable customer information.

At least theoretically.

But cutting out the middleman also can mean new kinds of problems, such as figuring out how to fulfill onesie and twosie orders from consumers, setting up new customer-service centers and dealing with backlash from retailers and other spurned channel partners.

Levi Strauss & Co. didn't score any points with its original e-commerce strategy, which shut out retailers from selling its blue jeans and other clothing online. Initially, Levi Strauss thought it wanted to keep the cybermarket to itself But less than a year later, the $6 billion manufacturer, which had invested several million dollars in its online effort, abruptly changed course. In October, the company announced that it would quit direct sales on the Web and leave online selling of its clothing to retailers like J. C. Penney Co. and Macys.com. It seems the manufacturer just couldn't generate enough online sales to offset its considerable online costs.

So, say hello to "reintermediation."

"Levi's is a perfect example of a manufacturer realizing it just didn't have the channel power it thought it would on the Web," says Gene Alvarez, an analyst at Meta Group Inc. in Stamford, Conn.

Rethinking Web Strategies

In a nutshell, using the Web to cut out the middleman isn't turning out to be all it was cracked up to be, according to Mike Bernstein, an analyst at Gartner Group Inc., also in Stamford. Consequently, more companies are rethinking their online strategies.

"The siren song of disintermediation is a powerful force that few companies have been able to resist," Bernstein says. "However, the sight of numerous battered ships among the rocks is causing an increasing number of companies to think twice before selling directly to customers."

In fact, Gartner predicts that more than half of all companies now building or maintaining direct-to-customer Web sites will abandon them over the next three years. Instead, they will rely on, among other things, new Web-based intermediaries that bring buyers and sellers together in new ways. In the business-to-business arena, these include the ever-increasing number of industry-specific digital marketplaces, such as PaperExchange.com and e-Steel.com.

New Business Models

Disintermediation is already taking a hit on the business-toconsumer front, where new business models, such as cobranding and digital channel management - as opposed to channel cannibalization - are beginning to take hold.

OfficeDepot.com, for example, cut a deal earlier this year with Hewlett-Packard Co. under which it could sell HP's Series 2000 printers exclusively for a short period of time, giving it a head start over its competitors in the retail channel. In exchange, OfficeDepot.com, which is one of HP's largest retailers, sent key marketing and customer data back to HP.

Another example is Minneapolis-based 3M Co., which, rather than compete with resellers, is working with them to create Web-based cobranded showrooms for its line of ergonomic products and accessories. The online showrooms allow 3M to control how its products are portrayed and to gather valuable data about users of its products.

Resellers, meanwhile, handle all consumer transactions and product fulfillment, both of which are traditional stumbling blocks for manufacturers unaccustomed to shipping smaller orders.

Still another example is HomePoint Corp., a start-up online retailer in Greenville, S.C., which has signed up more than 200 furniture makers and dealers to participate in its new e-commerce model. Under the model, manufacturers, retailers and HomePoint all earn a profit from online sales that are executed via HomePoint's Advantage Network.

"We realized from the start that you have to be able to deliver the product, handle returns and have a place for customer service," says HomePoint CEO Mike West.

That's one of the key reasons why HomePoint, a virtual company, opted against competing directly with brick-and-mortar furniture retailers. Instead, it enlisted them as distribution and fulfillment centers.

Ethan Allen Interiors Inc., a Danbury, Conn.-based furniture manufacturer with 310 stores, has adopted a similar model for moving sales online. Visitors to its Web site will soon be able to buy furniture and other home accessories online. But the items will be delivered and serviced by the company's stores, which are electronically connected via an extranet. In exchange, retailers will receive 10% of online sales receipts.

This strategy will be put to the test later this year when Ethan Allen launches its redesigned Web site, says CEO Farooq Kathwari.

Kathwari says the company launched its first Web site four years ago, primarily as a marketing tool. Back then, Ethan Allen - like so many other manufacturers - was reluctant to sell directly online for fear of alienating its 250 independently owned stores, which accounted for 60% of overall sales.

"A few years back, not one of us thought we'd be doing what we're doing today with the Internet," Kathwari says. "It's been an education process."

--------------------------------------------------------------------------------